The Inheritance Tax Act 1984 is the United Kingdom’s governing statute for taxing wealth transfers, both on death and during a person’s lifetime. It defines what counts as a taxable transfer, sets the thresholds and rates, lists the exemptions and reliefs, and prescribes how estates are valued and reported. The headline rules today are a 40 percent charge on the part of an estate above a £325,000 nil rate band, an extra £175,000 allowance where a home passes to direct descendants, and a set of reliefs for business and agricultural property that were substantially reshaped from 6 April 2026.1Legislation.gov.uk. Inheritance Tax Act 1984
What Triggers a Charge
The Act works from a single idea: any transaction that reduces the value of your estate is a transfer of value, and any transfer of value that isn’t specifically exempt is chargeable. The measure is the loss to the giver, not the gain to the recipient.
The most common trigger is death, when the entire net estate becomes chargeable. The Act also captures lifetime gifts, but their treatment depends on who receives them and how long the giver survives afterwards.
Tax-Free Thresholds
Nil Rate Band
Every person can pass on £325,000 free of inheritance tax. The band has been fixed at that level since April 2009 and will remain frozen until at least April 2030.2GOV.UK. Inheritance Tax Thresholds and Interest Rates
Residence Nil Rate Band
An additional £175,000 applies when a main home passes to direct descendants such as children or grandchildren.3GOV.UK. Inheritance Tax Nil-Rate Band, Residence Nil-Rate Band From 6 April 2028 Combined with the standard band, a single person can potentially leave up to £500,000 tax-free.
The residence allowance tapers for larger estates. Once the gross estate exceeds £2 million, it reduces by £1 for every £2 above that threshold, disappearing entirely for a single person at £2,350,000.
Transferable Nil Rate Band
Any unused percentage of a first spouse’s or civil partner’s nil rate band transfers to the survivor and is applied at the rate in force on the second death. In practice this lets a married couple pass on up to £650,000 tax-free, or up to £1 million when both residence allowances are available. The transfer is claimed on form IHT402, submitted with the main return; you’ll need the first spouse’s death certificate, their will if there was one, and evidence of how the estate was distributed.4GOV.UK. Inheritance Tax: Claim to Transfer Unused Nil Rate Band (IHT402)
The Rates
Anything above the available thresholds on death is taxed at a flat 40 percent.5HM Revenue and Customs. IHT400 Rates and Tables Lifetime transfers into most trusts are immediately chargeable at 20 percent on the amount above the nil rate band.
A reduced death rate of 36 percent applies where the deceased left at least 10 percent of the net estate to charity.6GOV.UK. Inheritance Tax Reduced Rate Calculator The net estate for this test is the value after exemptions, reliefs, and the nil rate band. On a £1 million estate with a £500,000 combined threshold, a £50,000 charitable gift cuts the rate on the remaining £450,000 from 40 to 36 percent, saving £18,000 in tax.
Lifetime Gifts and the Seven-Year Rule
Most gifts between individuals during life are potentially exempt transfers. They fall out of the estate entirely if the giver survives seven years. Die within that window and the gift is pulled back into the calculation and may become chargeable.7GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Rules on Giving Gifts
Gifts into most trusts don’t get this treatment. Putting assets into a discretionary trust, for example, is immediately chargeable at 20 percent on the amount above the nil rate band, not conditional on surviving seven years.
Taper Relief
Where a gift does become chargeable because the giver died within seven years, taper relief reduces the tax on gifts made more than three years before death. It works on the tax rate itself, not on the value of the gift, and it only matters when the total value of gifts in the seven years before death exceeds the £325,000 nil rate band.
- 3 to 4 years before death: 32 percent
- 4 to 5 years: 24 percent
- 5 to 6 years: 16 percent
- 6 to 7 years: 8 percent
- 7 years or more: no tax
Taper relief is often misunderstood. If lifetime gifts stay within the nil rate band, there is no tax for it to reduce.
Gifts With Reservation of Benefit
The Act works alongside anti-avoidance rules in the Finance Act 1986 that prevent giving assets away on paper while still enjoying them. Giving your house to your children but continuing to live in it rent-free is the classic case: the property is treated as still part of your estate at death, and the full value is taxed. To genuinely remove an asset, you have to give up all benefit from it, which for a gifted home means paying a full market rent. Retaining voting control or drawing dividends after gifting shares in a family company can trigger the same rules.
Main Exemptions
Spouse and Civil Partner
Transfers between spouses or civil partners are entirely exempt with no upper limit, provided both are long-term UK residents (or, before April 2025, both UK-domiciled). Where the receiving spouse is not a long-term UK resident, the exemption is capped at the nil rate band amount of £325,000.8HM Revenue and Customs. IHTM11033 – Spouse or Civil Partner Exemption The non-resident spouse can elect to be treated as UK-domiciled, which removes the cap but brings their worldwide assets into the UK tax net.
Annual and Small Gifts
Each person has a £3,000 annual exemption covering the total value of gifts in a tax year. Any unused portion carries forward one year only, giving a maximum two-year total of £6,000. Separately, you can make any number of small gifts of up to £250 per recipient per year, provided you haven’t already used another exemption on the same person.
Normal Expenditure Out of Income
Under Section 21, a gift is immediately exempt if it forms part of your normal pattern of giving, is made from income rather than capital, and leaves you with enough income to maintain your usual standard of living. There is no cap. Regular payments into a grandchild’s savings account funded from pension income are a typical example. HMRC generally looks for a pattern established over three to four years, though a single gift can qualify with clear evidence it was intended as the start of a regular commitment.
Charity
Gifts to registered charities are fully exempt whether made during life or on death, with no cap. Charitable bequests can also unlock the 36 percent reduced rate on the rest of the estate.
Business and Agricultural Relief
Two reliefs are designed to stop inheritance tax forcing the sale of working businesses and farms. Both were reshaped from 6 April 2026.
Business Property Relief
Sections 103 to 114 reduce the taxable value of qualifying business assets.9HM Revenue and Customs. SVM111010 – IHT Business Property Relief: Introduction Before April 2026, unquoted shares and interests in trading businesses qualified for 100 percent relief with no upper limit. From April 2026, 100 percent relief applies only to the first £2.5 million of combined qualifying business and agricultural property, or up to £5 million where unused allowance transfers from a predeceased spouse. Value above the cap qualifies for 50 percent relief. Shares traded on markets like AIM, which previously qualified for 100 percent relief, now receive 50 percent relief regardless of value.10GOV.UK. Reforms to Inheritance Tax Agricultural Property Relief and Business Property Relief
The asset must generally have been owned for at least two years before the transfer. The relief does not apply to businesses that mainly deal in securities, land, or investments rather than trading.
Agricultural Property Relief
Sections 115 to 124 provide equivalent relief for agricultural land, farm buildings, farmhouses, and associated cottages.11Legislation.gov.uk. Inheritance Tax Act 1984 – Section 115 The qualifying period is two years if you occupied the land for farming yourself, or seven years if someone else farmed it under a tenancy.12Legislation.gov.uk. Inheritance Tax Act 1984 – Chapter II Agricultural Property
The £2.5 million cap is shared with business property relief. If a farming estate includes £2 million of agricultural land and £1 million of qualifying business assets, only the first £2.5 million of that £3 million total gets 100 percent relief; the other £500,000 gets 50 percent. Where property qualifies for both reliefs, agricultural relief is applied first, and business relief cannot be claimed on any value already reduced by agricultural relief.
How Assets Are Valued
Section 160 requires assets to be valued at the price they would reasonably fetch on the open market between a willing buyer and willing seller, neither under pressure.13Legislation.gov.uk. Inheritance Tax Act 1984 – Section 160 Executors deduct legitimate debts, mortgages, outstanding loans, and reasonable funeral costs from the gross value to arrive at the net figure the tax works from.
Partial interests usually attract a discount. A 50 percent share in a house is typically worth less than half the total value because the buyer of a share can’t control the whole asset. Unquoted company shares need careful valuation reflecting underlying assets, trading, and the absence of a ready market.
Relief for Loss on Sale
If assets are sold after death for less than their probate value, executors can reclaim overpaid tax. For land and buildings the sale must happen within four years of death, claimed on form IHT38.14GOV.UK. Inheritance Tax: Claim for Relief – Loss on Sale of Land (IHT38) For qualifying investments such as listed shares and government bonds the window is 12 months, claimed on form IHT35.15HM Revenue and Customs. IHT35 – Claim for Relief – Loss on Sale of Shares Executors who distribute assets to beneficiaries before selling can lose the ability to claim.
Trusts: The Ten-Year and Exit Charges
Assets in discretionary trusts and most other relevant property trusts face a periodic charge on every tenth anniversary of the trust’s creation.16GOV.UK. Trusts and Inheritance Tax The maximum rate is 6 percent of trust value above the nil rate band, though the effective rate is often lower depending on the trust’s history and the settlor’s cumulative lifetime transfers. An exit charge also applies when assets leave the trust between anniversaries, calculated proportionally to the time held. The April 2026 £2.5 million cap on 100 percent business and agricultural relief applies to trust assets as well.
Paying and Reporting
The executor named in the will, or the administrator appointed by the court where there is no will, is responsible for calculating and paying the tax.17GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances For trust property, that duty falls on the trustees.
Payment Deadline
Tax is due by the end of the sixth month after the month of death. Someone dying in January has a 31 July deadline.18GOV.UK. Pay Your Inheritance Tax Bill Interest runs daily on any unpaid balance after that; the current HMRC late payment rate is 7.75 percent.
Certain slow-to-sell assets, including land, buildings, and controlling shareholdings, can be paid in ten equal annual instalments. The first is still due by the six-month deadline, with later payments on each anniversary.19GOV.UK. Pay Your Inheritance Tax Bill: In Yearly Instalments Interest accrues on the unpaid balance for most asset types, though on land and property instalments interest is only charged if payments are late.
Returns
The full return is form IHT400, submitted within 12 months of death.20GOV.UK. How to Value an Estate for Inheritance Tax and Report Its Value HMRC issues a unique code once the form is processed and tax paid, and that code is needed to apply for probate in England and Wales, or confirmation in Scotland.
Smaller estates qualify as excepted estates with simplified reporting. The key limits are a gross estate under £3 million where the estate passes to a surviving spouse or charity and is therefore exempt, and lifetime chargeable transfers below £250,000.21GOV.UK. Inheritance Tax: Reduced Reporting Requirements Excepted estates can proceed to probate without a full return, though HMRC retains the right to open enquiries within 60 days of the grant.